The Perils of Cost Cutting

We are potentially on the precipice of a recession, one punctuated by inflation.?Many senior executives are preparing for an economic downturn with margin compression rates that have not been seen in over 40 years (we are already seeing signs of margin compression in several industries).?Naturally, many executives are looking to cost cutting measures to help preserve their margins.?However, when you look back at the previous recession, and compare how enterprise did both through and post recession, those who were able to sustain (even accelerate) growth during the recession did the best coming out of the recession (see image below).??More broadly, sustained growth still seems to be an important ingredient for long term survival (https://www.mckinsey.com/featured-insights/employment-and-growth/why-its-still-a-world-of-grow-or-go).

Here is where the perils of cost cutting lie.?The machinery (i.e., processes, mindsets, technology) needed to take out and sustain cost reductions tends to have a long life, particularly with enterprise that have had to go through long periods of cost cutting, and it can be extremely challenging to reverse this machinery.?It is this machinery that can thwart growth as it tends to tamper risk taking and puts a significant overhead on growth initiatives that may end up discouraging investments (this is not surprising as this machinery is often designed to do just this).?Over time, creative, high-performing employees will leave such enterprises, which further thwarts these enterprises ability to grow, even during strong economic times.?

But finding growth, even in tough economic times, is possible...for the smartest enterprises. In today’s environment advanced technology, data, and AI will play a much bigger role in driving that growth.?This is because much of enterprises’ operations today relies on technology. ?In particular, much revenue today comes through digital channels in some form (e.g., retail sales in digital channels is >5X what is was in 2008).?In addition, particularly in more mature markets, enterprises will need to take a more granular and nuanced view of growth initiatives, which really can only be achieved through advanced analytics on very large data sets.?Following are a few examples (not exhaustive) of the areas where enterprises can look for growth in tougher economic times:

• Pricing/bundling Optimization:?By developing a more granular view of customer preferences, buying behaviors, and segmentation, enterprises can tailor bundles and pricing to capture a greater share of wallet
• Cognitive Care:?By leveraging AI and customer 360 analytics, enterprises can develop a real-time view of customer sentiment and in adjust customer service to quickly meet the needs of the customer.?This can lead to improved customer sentiment, lower churn rates, and an opportunity for up-selling.
• Digital Channel Expansion:?By expanding the channels where enterprises sell their goods/services, they can begin to reach a broader audience.?For example, enterprises should be expanding their social media presence beyond the traditional players to those that are tailored to specific population segments.?In addition, now is the time for enterprises to begin developing their presence in the meta-verse.
• Intelligent Customer Experience:?By leveraging technologies like IOT, sensors, and real-time analytics, enterprises can begin optimizing customer experiences, and in the process of improving these experiences, begin up-selling services (e.g. hotel/resort services, car rental services).
• Ecosystem Plays:?There is power in numbers.?By developing and/or participating in an ecosystem of customer products/services (e.g., rewards programs), there is an opportunity for enterprises to expand their sources of revenue.?This becomes particularly powerful when combined with other tech enabled growth initiatives (e.g., Intelligent Customer Experience).
• Data Monetization:?This is an opportunity that is largely untapped for most enterprises. Enterprises can find ways to package data gathered through the course of doing business, or even data manufactured through the use of the enterprises products/services, to be used in ancillary services.?For example, auto/engine manufacturers can use telemetry data to create “lock-in” with intelligent fleet management solutions/services, expanding the surface area of their sales force and driving greater market share.

These are just a handful of examples of what enterprises can do to drive growth in the coming months.?Enterprises should not take their eye off of growth and it is technology, data, and analytics that will enable them to sustain growth in the coming months.